US Judge Rejects Vanguard $40M Settlement Citing Superior SEC Accord

A Pennsylvania federal judge has rejected Vanguard Group's proposed $40 million class settlement with investors alleging surprise capital gains tax bills from Vanguard's target-date funds, ruling it left investors worse off than a separate $135 million SEC settlement. The judge noted that while the SEC settlement guarantees investors the full $40 million payout without any reduction for attorneys' fees, the class settlement would have deducted over $13 million for legal costs, resulting in less money for investors. The decision was influenced by an objection from investor John Hughes, who highlighted the disparity and termed the class settlement an example of "class action abuse." Vanguard and plaintiffs' attorneys were criticized for failing to disclose the SEC settlement’s impact during class settlement negotiations. Vanguard argued that rejecting the settlement could complicate resolving parallel civil and regulatory actions, but the judge emphasized that the class settlement was not "fair, reasonable, and adequate" since investors would receive a better outcome through the SEC enforcement action. Both settlements relate to Vanguard's 2020 restructuring of target-date funds, which prompted investor shifts from higher-cost retail funds and led to unexpected tax consequences.